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Demand revival spurs interest rate hike fears

Demand revival spurs interest rate hike fears
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First Published: Mon, Apr 12 2010. 11 50 PM IST

Graphic: Ahmed Raza Khan / Mint
Graphic: Ahmed Raza Khan / Mint
Updated: Mon, Apr 12 2010. 11 50 PM IST
New Delhi: Factory output grew at a double-digit rate for the fifth month in a row on the back of strong consumer and investment demand, setting the stage for a likely increase in interest rates by the Reserve Bank of India, or RBI, in its annual monetary policy due on 20 April.
The Index of Industrial Production, or IIP, grew 15.1% in February, lower than expected by economists, but further proof that the recovery in the non-farm economy is healthy and can take a withdrawal of fiscal and monetary support in its stride.
Graphic: Ahmed Raza Khan / Mint
The government will release data on 16 April that is likely to show that wholesale price inflation crossed over into double-digit territory in March.
The central bank increased two of its key policy rates on 19 March, a month ahead of schedule, as it shifted attention from supporting the economic recovery to concern about spiralling inflation.
Inflation touched a 16-month high of 9.89% in February as the initial food inflation spilled over into manufactured products.
RBI raised repo and reverse repo rates by 25 basis points each to 5% and 3.5%, respectively. These are rates at which the central bank lends and borrows overnight money from banks.
Rohini Malkani and Anushka Shah, economists with Citigroup India, in an advisory released on Monday said they expect RBI to increase rates by a minimum of 100 basis points in 2010, including the expected rate hike on 20 April.
Fourteen of the 17 industry groups reported production expansion during February, a sign that the recovery in industrial activity is broad-based. Significantly, consumer non-durable goods grew 2.3% in February, compared with a contraction of 3.65% in January on fears that high food prices were leaving families with less disposable income to purchase home and personal care products.
“Falling agricultural output and high inflation have taken their toll on production of nondurable goods, which should receive a boost in coming months from favourable weather conditions,” said Nikhilesh Bhattacharyya, associate economist with Moody’s Analytics.
“Based on capital goods production, investment looks set to grow strongly over coming quarters,” Bhattacharyya added. Capital goods production grew 44.45% in February, lower than 56.2% in January, led by machinery and transport equipment.
Malkani and Shah said that with industrial production averaging 10.1% during April-February during fiscal 2009-10 against 3% in the previous fiscal year, the economy is now showing clear signs of a demand revival. “Latest trends in non-oil imports (+56% in February) and bank credit (+17%) coupled with buoyant numbers in auto and cement dispatches also indicate that the momentum is picking up,” they said.
The CNBC-TV18 Boston Analytics Consumer Confidence Index for March released on Monday also rose by 0.9 percentage points to 73.3% from 72.6% in February.
“Consumer confidence in the March 2010 survey continues the improving trend observed in January of 2010,” said Sam Thomas, director, research and development at Boston Analytics.
“While the levels remain low, we continue to see relative improvement in consumer sentiment pertaining to employment conditions and consumer spending. Sentiment related to inflation, however, remains very weak,” he added.
Organisation for Economic Co-operation and Development composite leading indicators (CLIs) for February released on Monday continued to point to economic expansion, although at a different pace across countries and regions, with CLIs for India, Brazil and Russia recording moderate increases, pushing the indicators close to, or above, their long-term levels.
asit.m@livemint.com
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First Published: Mon, Apr 12 2010. 11 50 PM IST
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